Real estate is an exciting venture. Investment properties have the opportunity to bring along great growth for you in a financial sense. When searching for your perfect property, make sure to keep a few thoughts in mind. So, what is there to look for in an investment property?
Things To Keep In Mind For Investment Properties
Certain factors have the opportunity to be successful in an investment property. It’s important to take these into account when making your decision. Here is what to look for in an investment property:
Investing In The Location
When it comes to real estate, you might already be familiar with the mantra “location, location, location.” Location is everything for real estate investments and should be the primary starting point in your search for an investment property. Many considerations need to be made, and many of them boil down to if you want to be close to the property or not. Will your mind be more at ease if you can make a short drive to visit the property, or are you looking to invest in properties that you won’t be visiting on a regular basis? Are you going to be responsible for property management and maintenance, or do you intend to outsource those aspects?
The second thing to consider is what advantages the location offers you as a property owner. Is it in a good school district? Does it have easy access to interstate highways? What are the market trends for the area?
Navigating Your Finances
After you’ve decided on a location that suits your strategy, next is the big hurdle – financing. You typically will need excellent qualifications, as investment property mortgages are considered to be high risk. An alternative may be to consider an owner-occupied home, where you occupy one unit or room and rent out the others. This comes with advantages such as reduced down payments and interest rates but it isn’t the approach for everyone.
For non-owner-occupied properties, you should expect your mortgage to require a 20% down payment at minimum, with 25% being far more common. Unless you are in a position where you can pay in cash upfront, this needs to be accounted for in your financing plan. Remember that you’ll also be responsible for closing costs, and typically need 6 months of payments in reserve.
There are two approaches to financing – conventional financing and asset-based loans. Conventional financing refers to mortgages from a bank that is backed by your personal qualifications. The considerations for conventional financing of an investment property include the type of property, your credit score, employment status, assets, and other debts. While you may be able to use some of the property’s projected rental income to qualify, your current income is going to be the main factor. That means if your existing mortgage or debt uses a large portion of your gross income, it might be difficult to get conventional financing.
If a conventional loan isn’t a good fit, asset-based loans might be an option. Asset-based loans use the investment property itself as the main qualifying factor instead of the borrower’s personal qualifications. While your credit score will still help to determine your eligibility and interest rate, you do not have to worry about personal debts, income, and employment. The primary condition for approval is that the property generates sufficient cash flow to cover the mortgage payments with a reasonable cushion.
Calculate The Cost of Maintenance
Whichever approach you pick, projecting your cash flow is going to be your next significant consideration. If it costs more to own and maintain the property than the property is bringing in, then the property isn’t going to make a good investment property.
Cash flow can often be variable and you’re never going to be operating from a position of 100% certainty when projecting it, but a good rule of thumb is to set aside 15% of rental income to cover vacancy and maintenance.
Example of Good Cash Flow
- Start with the expected monthly rental income
- Subtract your mortgage payment, taxes, and insurance cost
- Subtract your property manager’s fee (if you use one)
- Subtract any recurring expenses
- Subtract your vacancy and maintenance set aside
If you have a nice cushion after your subtractions, the investment property could be a valuable asset to you.
Plan For Gap Periods
One thing that might have caught your eye is vacancy. Vacancy and other gap periods can negatively affect cash flow but are an unfortunate reality. If your cash flow is right down to the margin and you need the full monthly rental income to break into the positive you will only be able to cover
expenses when things are going perfectly. One thing investment property owners learn quickly is that things don’t always go perfectly.
There will be times that your property is vacant. Repairs or maintenance in between tenants, for one. If you are buying an investment property that already has residents with signed leases – find out the terms of those leases immediately (e.g., are they annual or month to month?) so you are not hit by any sudden unexpected gaps when you take over ownership.
Do You Need A Property Manager?
Another crucial decision you need to make is, do you want to self-manage the investment property or outsource to a property management company? Property managers typically charge between 8% and 10% of the collected rent but come with benefits such as:
- A wealth of experience that can help you to maximize rental income
- The ability to advertise and attract tenants
- Conduct background and credit checks on prospective tenants
- Collecting rent for you
- Serving as the primary contact for maintenance issues and tenant complaints
- Paying bills or utilities on your behalf
A property manager can help free up your time but at a cost. Make sure that you calculate in this cost when you are determining your cash flow projections.
Team Up With The Experts At The Katie Zarpas Group
Reach out to the real estate professionals at the Katie Zarpas Group in Virginia Beach for more information about buying your first investment property. At the Katie Zarpas Group, we help clients obtain key information about listings in Virginia Beach and the surrounding areas, including Norfolk, Chesapeake, Portsmouth, and Suffolk. We strive to constantly track local real estate market trends, which means we can help you estimate your desired investment property value. Our team can help you to identify what to look for in an investment property.
We will always put your priorities first, regardless of what you are seeking. Call the Katie Zarpas Group today at (757) 685-4400 or schedule an appointment online to learn more about our work. We look forward to discussing what to look for in an investment property, and helping you in your process!